FCA reviews wholesale insurance broker sector

By Huw Jones and Carolyn Cohn

LONDON (Reuters) - Britain's markets watchdog will review whether the wholesale insurance broker sector is giving value for money following concerns about how large players place business to earn fatter fees.

The Financial Conduct Authority (FCA) said "broker facilities" will be a focus, a reference to how a broker groups together different types of insurance business for different clients and then allocates chunks of this business to insurers.

This should make insurance cheaper for clients but can leave insurers with little scope to dictate their own terms.

The London insurance market controlled more than $91 billion in gross written premium in 2015. It comprises the Lloyd's of London market [SOLYD.UL] and brokers such as Aon (AON.N), Willis Towers Watson (WLTW.O), JLT (JLT.N) and Marsh (MMC.N).

The FCA said larger brokers may be using their market power to oblige insurers to sign up to these facilities or pay for wider services such as data, analysis and product design.

"The London broker's role is to make sure that their clients obtain appropriate coverage for their needs, at a price that represents value for money," the FCA said in its 30-page terms of reference document for the review published on Wednesday.

The review will also look at conflicts of interest in the sector as there may be extra incentives for brokers to place business in facilities even where it may not be the best option for their clients because in many cases they receive fatter fees, the FCA said.

An insurance specialist said facilities were popular with brokers because they cut the cost of placing insurance and boost commission. "The question is whether they are in the best interests of the end customer?"

The British Insurance Brokers' Association said the sector has inevitably evolved and developed over the years with innovations, new services and business practices.

"We believe this is a market that does work well and our members will cooperate with the regulator to demonstrate this," BIBA Chief Executive Steve White said in a statement.

The review will also study how brokers influence competition in the underwriting sector, such as by placing business in facilities rather than on the open market. It will also examine whether some brokers' conduct creates barriers to entry to others.

"The FCA believes that effective competition contributes to ensuring London remains an international centre for insurance."

Britain's government is keen for the City of London to remain the world's largest financial centre after the UK leaves the European Union in 2019, and financial services are also a major tax earner for treasury coffers.

Evan Greenberg, chairman and chief executive of insurer Chubb (CB.N), told shareholders in April that the "soft" insurance market was a sign of "abusive behaviour" by some brokers who "enrich themselves at the expense of both their customers and underwriters".

The FCA has powers to force through changes in the structure of the market if it finds uncompetitive behaviour.

The watchdog will publish interim findings in autumn 2018 with "any potential solutions to address concerns".

(Reporting by Huw Jones; editing by Jason Neely and Adrian Croft)